CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
SECTION A – External Financial Reporting Decisions (Weightage 15%)
S.No Questions Answers
1. Who are direct users of Direct users are directly affected by a company’s financial results and
financial statements? stand to lose money if the company has financial problems.
Direct users include investors and potential investors, employees,
management, suppliers, and creditors.
2. Who are indirect users of Indirect users are people or groups who represent direct users.
financial statements? Indirect users include financial analysts and advisors, stock markets,
and regulatory bodies.
3. What are the five 1) Balance Sheet (also called the Statement of Financial Position)
financial statements? 2) Income Statement
3) Statement of Cash Flows
4) Statement of Comprehensive Income
5) Statement of Changes in Stockholders’ Equity
4. What does the The balance sheet provides information about an entity’s assets,
balance sheet show? liabilities, and owners’ equity at a point in time.
5. What are the elements of 1) Assets
the balance sheet? 2) Liabilities
3) Equity (or net assets)
6. What is the proprietary Proprietary theory is way that the balance sheet presents the assets,
theory? liabilities, and equity, showing that the net assets belong to the
owners of the company.
7. What is an asset? Future economic benefits obtained or controlled by an entity as a
result of past transactions or events.
8. What is a liability? Probable future economic sacrifices of economic benefits that arise
from the present obligations of the company to transfer assets or
provide services to other entities in the future as a result of past
transactions or events.
9. What is equity? The remaining balance of assets after the subtraction of all liabilities.
This is the amount of the company’s assets that are owned by and
owed to the owners.
10. What are current assets? Assets that will be converted into cash or sold or consumed within 12
months or within one operating cycle if the operating cycle is longer
than 12 months.
11. What are current Obligations that will be settled through the use of current assets or
liabilities? by the creation of other current liabilities.
12. What are the 1) Capital stock
six categories of equity? 2) Additional paid-in capital
3) Retained earnings
4) Accumulated other comprehensive income items
5) Treasury stock
6) Non-controlling interest
13. What does the balance The balance sheet provides a basis for computing rates of return,
sheet evaluating the capital structure of the business, and predicting a
help assess? company’s future cash flows.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 6 of 154
, CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
The balance sheet helps to assess the company’s liquidity, financial
flexibility, solvency, and risk.
14. What are some of the • Many assets are not reported on the balance sheet.
limitations • Values of certain assets are measured at historical cost.
of the balance sheet? • Judgments and estimates determine the value of many items
reported in the balance sheet.
• Most liabilities are valued at the present value of cash flows
discounted at the rate that was current when the liability was
incurred, not at the present value of cash flows discounted at
the current market interest rate.
15. What does the The results of a company’s operations during a given period of time.
income statement show?
16. What does the income The amounts, timing, and uncertainty of (or prospects for) future cash
statement help assess? flows.
17. What are the four 1) Revenues
elements 2) Expenses
of the income statement? 3) Gains
4) Losses
18. What are revenues? Revenues represent inflows of assets or reductions in liabilities as a
result of delivering goods or providing services that are the entity’s
main or central operations.
19. What are expenses? Expenses are outflows of cash or other assets or the incurrence of
liabilities as a result of purchasing goods or services that are necessary
to provide the entity’s main or central operations.
20. What are the three 1) Cause and effect
methods of recognizing 2) Systematic and rational allocation
expenses? 3) Immediate recognition
21. What are gains? Increases in equity as a result of transactions that are not part of the
company’s main or central operations and that do not result from
revenues or investments by the owners of the entity.
22. What are losses? Decreases in equity as a result of transactions that are not part of
the company’s main or central operations and that do not result
from expenses or distributions made to owners of the entity.
23. What is a discontinued A disposal of a component or group of components that is either
operation? disposed of or held for sale and represents a strategic shift that has
or will have a major effect on the entity’s operations and financial
results.
24. What is the primary The primary purpose of the statement of cash flows is to provide
purpose of information regarding receipts and uses of cash for the company
the statement of cash during a specified period of time.
flows?
25. What are the three 1) Operating activities
categories of activities on 2) Investing activities
the statement of cash 3) Financing activities
flows?
From the Desk of Muhammad Zain – Founder of Zain Academy Page 7 of 154
, CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
26. What are the 1) Direct method
two methods of preparing 2) Indirect method
the
statement of cash flows?
27. Under the indirect method, Net income is adjusted under the indirect method.
what account is adjusted to
calculate cash flows from
operations?
28. What are the 1) Eliminate noncash income and expense items.
five categories of 2) Eliminate investing and financing activity events whose
adjustments under the results are included in the income statement.
indirect method? 3) Include the effect of any operating activities that were not
included in net income but did have a cash effect and exclude
(eliminate) the effect of any events that are included in net
income but did not have a cash effect.
4) Adjust cash flows from the purchase, sale, and maturity of
trading securities.
5) Specific disclosures required with the indirect method.
29. What is the adjustment to The amount of the increase in net accounts receivable is subtracted
net income for an increase from net income because the cash corresponding to this amount of
in the net receivable revenue recognized during the period was not received during the
position during the year? period.
A decrease in receivables during the period is added to income.
30. What is the adjustment to • The amount of an increase in an asset account should be
net income for the change deducted from net income.
in an • The amount of a decrease in an asset account should be
asset during the period? added to net income.
31. What is the adjustment to • The amount of an increase in a liability account should be
net income for the change added to net income.
in a • The amount of a decrease in a liability account should be
liability during the period? deducted from net income.
32. How are noncash investing Separately in a schedule at the end of the statement of cash flows.
and financing activities
reported on the statement
of cash flows?
33. What is included in the Comprehensive income includes all transactions of the company
statement of except for those transactions that are made with the owners of the
comprehensive income? company (such as distribution of dividends or the sale of shares).
34. What are the four basic 1) Measurement
principles of accounting 2) Revenue recognition
used to record and report 3) Expense recognition
transactions? 4) Full disclosure
35. What are different 1) Historical cost
bases of measurement? 2) Fair value
36. What is matching? Revenues should be recognized in the same period as the expenses
that generated those revenues are expensed.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 8 of 154
, CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
37. What items are included in 1) Cash (of any currency)
cash? 2) Savings accounts
3) Checking accounts
38. What are cash equivalents? Very short-term, highly-liquid investments that have a maturity of
three months or less when acquired by the company.
39. What are the two allowed 1) Percentage of sales method
methods for valuing 2) Percentage of receivables method
accounts receivable?
40. What is calculated and The amount of bad debt expense is calculated and the ending balance
what is a residual balance in the allowance account is the residual amount.
under the percentage of
sales method?
41. What is calculated and The ending balance in the allowance account is calculated and the
what is a residual balance amount of bad debt expense is the residual amount.
under the percentage of
receivables method?
42. What are the two ways 1) Without recourse
that receivables may be 2) With recourse
factored?
43. How is the cash Face value of the accounts receivable
to be received by the seller − Factoring fee (a % of the face value of the receivables)
of receivables calculated? − Factor’s holdback for merchandise returns (a % of the face
value of the receivables)
= Funds deposited to the seller’s account
− Interest expense
= Cash available to the seller to withdraw
44. What value should Inventory should be recorded in the books at the amount that
inventory be recorded at includes all of the costs paid for getting the inventory ready and
when it is purchased? available for sale.
Costs include the cost of the inventory, shipping costs to receive the
inventory, insurance, taxes and tariffs, duties, and all other costs
related to receiving the inventory to sell to the customer.
45. Are in-transit goods The owner of the goods at year-end is determined by the terms of
included in inventory? shipping.
• Goods sent FOB Shipping Point belong to the buyer from the
moment the seller gives them to the shipping company.
• Goods sent FOB Destination belong to the seller until the
buyer receives them.
46. When are consigned goods Consigned goods are included in the inventory of the company has
included in inventory? the goods out on consignment.
Ownership of the consigned goods transfers directly from the
producer of the goods to the final purchaser.
47. What are the cost flow 1) First in First Out (FIFO)
assumptions for inventory? 2) Last in First Out (LIFO)
3) Average Cost
4) Specific Identification
From the Desk of Muhammad Zain – Founder of Zain Academy Page 9 of 154
PART 1
SECTION A – External Financial Reporting Decisions (Weightage 15%)
S.No Questions Answers
1. Who are direct users of Direct users are directly affected by a company’s financial results and
financial statements? stand to lose money if the company has financial problems.
Direct users include investors and potential investors, employees,
management, suppliers, and creditors.
2. Who are indirect users of Indirect users are people or groups who represent direct users.
financial statements? Indirect users include financial analysts and advisors, stock markets,
and regulatory bodies.
3. What are the five 1) Balance Sheet (also called the Statement of Financial Position)
financial statements? 2) Income Statement
3) Statement of Cash Flows
4) Statement of Comprehensive Income
5) Statement of Changes in Stockholders’ Equity
4. What does the The balance sheet provides information about an entity’s assets,
balance sheet show? liabilities, and owners’ equity at a point in time.
5. What are the elements of 1) Assets
the balance sheet? 2) Liabilities
3) Equity (or net assets)
6. What is the proprietary Proprietary theory is way that the balance sheet presents the assets,
theory? liabilities, and equity, showing that the net assets belong to the
owners of the company.
7. What is an asset? Future economic benefits obtained or controlled by an entity as a
result of past transactions or events.
8. What is a liability? Probable future economic sacrifices of economic benefits that arise
from the present obligations of the company to transfer assets or
provide services to other entities in the future as a result of past
transactions or events.
9. What is equity? The remaining balance of assets after the subtraction of all liabilities.
This is the amount of the company’s assets that are owned by and
owed to the owners.
10. What are current assets? Assets that will be converted into cash or sold or consumed within 12
months or within one operating cycle if the operating cycle is longer
than 12 months.
11. What are current Obligations that will be settled through the use of current assets or
liabilities? by the creation of other current liabilities.
12. What are the 1) Capital stock
six categories of equity? 2) Additional paid-in capital
3) Retained earnings
4) Accumulated other comprehensive income items
5) Treasury stock
6) Non-controlling interest
13. What does the balance The balance sheet provides a basis for computing rates of return,
sheet evaluating the capital structure of the business, and predicting a
help assess? company’s future cash flows.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 6 of 154
, CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
The balance sheet helps to assess the company’s liquidity, financial
flexibility, solvency, and risk.
14. What are some of the • Many assets are not reported on the balance sheet.
limitations • Values of certain assets are measured at historical cost.
of the balance sheet? • Judgments and estimates determine the value of many items
reported in the balance sheet.
• Most liabilities are valued at the present value of cash flows
discounted at the rate that was current when the liability was
incurred, not at the present value of cash flows discounted at
the current market interest rate.
15. What does the The results of a company’s operations during a given period of time.
income statement show?
16. What does the income The amounts, timing, and uncertainty of (or prospects for) future cash
statement help assess? flows.
17. What are the four 1) Revenues
elements 2) Expenses
of the income statement? 3) Gains
4) Losses
18. What are revenues? Revenues represent inflows of assets or reductions in liabilities as a
result of delivering goods or providing services that are the entity’s
main or central operations.
19. What are expenses? Expenses are outflows of cash or other assets or the incurrence of
liabilities as a result of purchasing goods or services that are necessary
to provide the entity’s main or central operations.
20. What are the three 1) Cause and effect
methods of recognizing 2) Systematic and rational allocation
expenses? 3) Immediate recognition
21. What are gains? Increases in equity as a result of transactions that are not part of the
company’s main or central operations and that do not result from
revenues or investments by the owners of the entity.
22. What are losses? Decreases in equity as a result of transactions that are not part of
the company’s main or central operations and that do not result
from expenses or distributions made to owners of the entity.
23. What is a discontinued A disposal of a component or group of components that is either
operation? disposed of or held for sale and represents a strategic shift that has
or will have a major effect on the entity’s operations and financial
results.
24. What is the primary The primary purpose of the statement of cash flows is to provide
purpose of information regarding receipts and uses of cash for the company
the statement of cash during a specified period of time.
flows?
25. What are the three 1) Operating activities
categories of activities on 2) Investing activities
the statement of cash 3) Financing activities
flows?
From the Desk of Muhammad Zain – Founder of Zain Academy Page 7 of 154
, CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
26. What are the 1) Direct method
two methods of preparing 2) Indirect method
the
statement of cash flows?
27. Under the indirect method, Net income is adjusted under the indirect method.
what account is adjusted to
calculate cash flows from
operations?
28. What are the 1) Eliminate noncash income and expense items.
five categories of 2) Eliminate investing and financing activity events whose
adjustments under the results are included in the income statement.
indirect method? 3) Include the effect of any operating activities that were not
included in net income but did have a cash effect and exclude
(eliminate) the effect of any events that are included in net
income but did not have a cash effect.
4) Adjust cash flows from the purchase, sale, and maturity of
trading securities.
5) Specific disclosures required with the indirect method.
29. What is the adjustment to The amount of the increase in net accounts receivable is subtracted
net income for an increase from net income because the cash corresponding to this amount of
in the net receivable revenue recognized during the period was not received during the
position during the year? period.
A decrease in receivables during the period is added to income.
30. What is the adjustment to • The amount of an increase in an asset account should be
net income for the change deducted from net income.
in an • The amount of a decrease in an asset account should be
asset during the period? added to net income.
31. What is the adjustment to • The amount of an increase in a liability account should be
net income for the change added to net income.
in a • The amount of a decrease in a liability account should be
liability during the period? deducted from net income.
32. How are noncash investing Separately in a schedule at the end of the statement of cash flows.
and financing activities
reported on the statement
of cash flows?
33. What is included in the Comprehensive income includes all transactions of the company
statement of except for those transactions that are made with the owners of the
comprehensive income? company (such as distribution of dividends or the sale of shares).
34. What are the four basic 1) Measurement
principles of accounting 2) Revenue recognition
used to record and report 3) Expense recognition
transactions? 4) Full disclosure
35. What are different 1) Historical cost
bases of measurement? 2) Fair value
36. What is matching? Revenues should be recognized in the same period as the expenses
that generated those revenues are expensed.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 8 of 154
, CERTIFIED MANAGEMENT ACCOUNTANT (CMA) -
PART 1
37. What items are included in 1) Cash (of any currency)
cash? 2) Savings accounts
3) Checking accounts
38. What are cash equivalents? Very short-term, highly-liquid investments that have a maturity of
three months or less when acquired by the company.
39. What are the two allowed 1) Percentage of sales method
methods for valuing 2) Percentage of receivables method
accounts receivable?
40. What is calculated and The amount of bad debt expense is calculated and the ending balance
what is a residual balance in the allowance account is the residual amount.
under the percentage of
sales method?
41. What is calculated and The ending balance in the allowance account is calculated and the
what is a residual balance amount of bad debt expense is the residual amount.
under the percentage of
receivables method?
42. What are the two ways 1) Without recourse
that receivables may be 2) With recourse
factored?
43. How is the cash Face value of the accounts receivable
to be received by the seller − Factoring fee (a % of the face value of the receivables)
of receivables calculated? − Factor’s holdback for merchandise returns (a % of the face
value of the receivables)
= Funds deposited to the seller’s account
− Interest expense
= Cash available to the seller to withdraw
44. What value should Inventory should be recorded in the books at the amount that
inventory be recorded at includes all of the costs paid for getting the inventory ready and
when it is purchased? available for sale.
Costs include the cost of the inventory, shipping costs to receive the
inventory, insurance, taxes and tariffs, duties, and all other costs
related to receiving the inventory to sell to the customer.
45. Are in-transit goods The owner of the goods at year-end is determined by the terms of
included in inventory? shipping.
• Goods sent FOB Shipping Point belong to the buyer from the
moment the seller gives them to the shipping company.
• Goods sent FOB Destination belong to the seller until the
buyer receives them.
46. When are consigned goods Consigned goods are included in the inventory of the company has
included in inventory? the goods out on consignment.
Ownership of the consigned goods transfers directly from the
producer of the goods to the final purchaser.
47. What are the cost flow 1) First in First Out (FIFO)
assumptions for inventory? 2) Last in First Out (LIFO)
3) Average Cost
4) Specific Identification
From the Desk of Muhammad Zain – Founder of Zain Academy Page 9 of 154
